UBS Has $2 Billion Trading Loss; Man Arrested in London

By Elena Logutenkova -
Sep 15, 2011

UBS AG (UBSN), Switzerland’s biggest bank,
said it may be unprofitable in the third quarter after a $2
billion loss from unauthorized trading at its investment bank.

London police arrested Kweku Adoboli, a UBS employee, in
connection with the loss, according to a person with knowledge
of the situation who requested anonymity. City of London police
and UBS declined to identify the man.

UBS management aims to “get to the bottom of the matter as
quickly as possible, and will spare no effort to establish
exactly what has happened,” the bank’s group executive board,
led by Chief Executive Officer Oswald Gruebel, said in a memo to
staff today.

The bank tumbled the most since March 2009 in Swiss trading
following the announcement, which deals a blow to Gruebel’s
attempts to rebuild the investment bank after the division
recorded 57.1 billion Swiss francs ($65 billion) in cumulative
pretax losses in three years through 2009. The trading loss may
revive calls for Gruebel to shrink or shut the unit.

“How many times do we have to see huge UBS losses?” said
Simon Maughan, head of sales and distribution at MF Global Ltd.
in London. “It looks unreformed, unwieldy and ultimately
unsustainable. This could be a critical tipping point for UBS’s
strategy.”

‘Suspicion of Fraud’

UBS fell 11 percent to 9.75 francs, bringing the drop this
year to 36 percent, compared with a 33 percent decline in the
46-company Bloomberg Europe Banks and Financial Services Index.

A 31-year-old man was arrested at business premises in
central London at 3:30 a.m. on “suspicion of fraud by abuse of
position,” City of London Police Commander Ian Dyson said in a
statement today. The man remains in custody while the police
investigate, the police said.

Adoboli’s LinkedIn page lists him as a director in ETF and
Delta1 Trading at UBS investment bank in London. He previously
held the position of trade support analyst at the investment
bank, according to the LinkedIn profile. A University of
Nottingham spokeswoman confirmed that Adoboli graduated from the
school in July 2003, earning a degree in Computer Science.

Risk Management

The matter is still under investigation and the “current
estimate of the loss on the trades is in the range of $2
billion,” UBS said in a statement today, the third anniversary
of the collapse of Lehman Brothers Holdings Inc. No client
positions were affected, the company said, declining further
comment.

UBS had to raise more than $46 billion in capital from
investors, including the Swiss state, to make up for the record
losses during the credit crisis. The investment-banking unit had
pretax earnings of 1.21 billion francs in the first half of
2011, while UBS as a whole had net income of 2.82 billion francs
in the period.

The bank’s tier 1 capital at the end of the second quarter
was 37.39 billion francs, giving it a tier 1 capital ratio of
18.1 percent, compared with 14 percent at Deutsche Bank AG,
Germany’s biggest bank.

While the loss is “manageable” for UBS, it’s “obviously
not helpful for sentiment and confidence in the bank’s risk
management following the near-death experience of 2008-2009,”
said Andrew Lim, a London-based analyst at Espirito Santo
Investment Bank, in a note. Lim had estimated third-quarter net
income of 1.1 billion francs for UBS.

Gruebel, Kengeter

UBS last month said it will eliminate about 3,500 jobs,
with about 45 percent of the reductions coming from the
investment bank, as stricter capital requirements and market
turmoil hurt the earnings outlook. The bank in July scrapped the
target of doubling pretax profit from last year’s level to 15
billion francs by 2014.

Gruebel, 67, and Carsten Kengeter, 44, who runs the
investment bank, have been trying to revive earnings at the
division for two years. They hired more than 1,700 people across
the investment bank and brought in new business heads to replace
those that left or were fired. They’ve also increased risk-taking to improve earnings opportunities.

The investment bank last had a pretax loss in the third
quarter of 2010 when what Gruebel called “very low levels of
client activity” and a charge related to the bank’s own debt
hurt revenue at the division.

Kerviel, Leeson

UBS’s trading loss doesn’t rank as the largest. Societe
Generale SA (GLE) of Paris said in January 2008 that the bank lost 4.9
billion euros ($6.7 billion) after trader Jerome Kerviel took
unauthorized positions on European stock index futures.

Credit Suisse Group AG, Switzerland’s second-biggest bank,
had a loss in the first quarter of 2008 in part because of
writedowns on debt securities that were intentionally mispriced
by a group of traders.

Costas, Wuffli

UBS, created through a merger of Swiss Bank Corporation and
Union Bank of Switzerland in 1998, was shaken in its first year
of existence as the new entity by losses related to Union Bank’s
$1 billion investment in Greenwich, Connecticut-based hedge-fund
firm Long-Term Capital Management, which was rescued by a
consortium of banks.

This century the bank was among the first stung by the
subprime contagion when its Dillon Read Capital Management LP
hedge fund, run by former investment banking chief John Costas,
lost 150 million francs in the first quarter of 2007. By May
that year, UBS decided to close it, and in July CEO Peter Wuffli
stepped down.

Subprime-related losses that followed at UBS’s securities
unit also led to the departures of executives including finance
chief Clive Standish and Huw Jenkins, the head of the investment
bank. Chairman Marcel Ospel resigned in April 2008 after
shareholders demanded he take responsibility for the bank’s
woes.

Gruebel, who formerly ran Credit Suisse, was brought out of
retirement by UBS in February 2009 to take over from CEO Marcel Rohner after the company posted the biggest annual loss in Swiss
corporate history. A former bond trader, Gruebel doubled profit
at Credit Suisse between 2004 and 2006.